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Options Edge: Stanley Works, MasterCard, Canadian Solar Inc., and Chesapeake Energy

A newly proposed merger could create a titan in the tool industry

by Elizabeth Harrow (eharrow@sir-inc.com) 11/3/2009 9:21 AM

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Today's column includes merger-and-acquisition news from The Stanley Works (SWK), an upside surprise from MasterCard Incorporated (MA), a bullish brokerage note for Canadian Solar Inc. (CSIQ), and disappointing quarterly results from Chesapeake Energy Corporation (CHK). Each day, Options Edge focuses on the hot stocks in the news and gives you a unique insight into each stock's sentiment backdrop. Our time-tested contrarian approach centers on options, and gives you the trading tools to approach the day with a much-needed edge over the investing herd.

The Stanley Works

Late Monday, The Stanley Works (SWK: sentiment, chart, options) announced that it has agreed to acquire Black & Decker (BDK) for $4.5 billion in stock, in a deal that will create a giant in the tool industry. The offer values BDK at $57.57 per share, representing a 22% premium to yesterday's close. The deal is expected to create savings of $350 million per year, and SWK thinks the acquisition should add to earnings by the third year.

SWK price chart Although SWK and BDK are both major players in the tool industry, Black & Decker spokesman Roger Young says that the two firms aren't anticipating "significant antitrust issues." Since Stanley specializes in hand tools and BDK is more focused on power tools, "our products are highly complementary," explained Young.

SWK is up nearly 5% in pre-market trading, with investors apparently cheering the strategic move. The stock is enjoying a strong performance in 2009, having already added more than 32% year-to-date. Since late March, SWK has climbed along support at its 10-week and 20-week moving averages.

Despite the positive price action, SWK receives very little attention from speculative traders. Peak open interest in the front-month series consists of just 1,420 contracts at the November 47.50 call. Based on the stock's early gains, this out-of-the-money strike could be at-the-money by the time the opening bell sounds.

MasterCard Incorporated

MasterCard Incorporated (MA: sentiment, chart, options) stepped into the earnings spotlight this morning, with the company reporting a third-quarter profit of $452 million, or $3.45 per share. By contrast, MA lost $194 million, or $1.48 per share, in the year-ago period. Revenue for the recently concluded quarter rose 2% to $1.4 billion, thanks in part to higher banking fees. Expenses fell 13% to $685 million.

This morning's results topped analysts' consensus expectations, which called for a profit of $2.94 per share on revenue of $1.35 billion. As a result, MA is up 1.1% ahead of the open, with the stock poised to regain a foothold above its 10-day moving average.

In anticipation of today's earnings report, option volume swelled on Monday. Call trading surged to twice the usual levels, while put activity jumped to 190% the norm. The day's most active strikes were the November 220 call, with 2,794 contracts changing hands, and the November 230 call, where 2,317 contracts crossed the tape. Most of these calls traded near the ask price, and open interest rose at both strikes overnight -- confirming that new bullish bets were added ahead of earnings.

Canadian Solar Inc.

Canadian Solar Inc. (CSIQ: sentiment, chart, options) scored an upgrade this morning, as Barclays Capital boosted its opinion from "underweight" to "equal weight." CSIQ's ability to secure financing is a positive catalyst, explained analyst Vishal Shah in a note to clients. "With potential dilution risk out of the way, we see more balanced risk-reward resulting from robust near term fundamentals, improving bankability situation and relatively attractive valuation," noted Shah, who simultaneously hiked his price target on CSIQ from $11.50 to $16.

Shares of the solar stock are fractionally higher in electronic trading, but there are a few technical concerns for CSIQ. The equity recently breached support from its 80-day and 20-week moving averages, and both trendlines have switched roles to exert resistance in recent sessions. The looming $15 level could also be a challenge, since CSIQ has managed just one monthly close above this region since September 2008.

Traders appear to be keenly aware of these potential threats to CSIQ's positive price action, as puts have recently gained popularity among option players. During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open 0.58 put for every call on the shares. This ratio ranks higher than 85.4% of other such readings taken during the past year, suggesting that puts have rarely been purchased over calls at a faster pace.

Chesapeake Energy Corporation

Last night, Chesapeake Energy Corporation (CHK: sentiment, chart, options) confessed that its third-quarter net income plummeted 94%, as bottom-line results were hammered by a drop in commodity prices. CHK banked a profit of $192 million, or 30 cents per share, compared to its year-ago earnings of $3.32 billion, or $5.62 per share. Revenue for the period fell 76% to $1.81 billion. Both figures fell short of Wall Street's expectations, which called for a profit of 65 cents per share on $1.96 billion in revenue.

CHK is off more than 2% in pre-market trading, and the shares are now in danger of breaching intermediate-term support at their 20-week moving average. This trendline hasn't been violated on a weekly closing basis since early July.

Meanwhile, put players must be feeling vindicated by the lackluster earnings results. Peak put open interest in the November series lies at the 25 strike, with 17,691 contracts outstanding. Based on CHK's early weakness, these bearish bets are set to go even deeper in the money today.

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